According to the Zhitong Finance APP, U.S. government bond investors are beginning to bet that the Federal Reserve will soon shift from concerns about stubborn inflation to focusing on slowing economic growth. This sentiment has driven U.S. Treasury bonds to rise for the sixth consecutive trading day, with yields falling to their lowest level this year. Meanwhile, Morgan Stanley strategists have indicated that if the market's general view of the Federal Reserve changes, the yield on 10-year Treasury bonds could fall below 4%.
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Figure 1
This week, traders have resumed expectations for two 25 basis point rate cuts by the Federal Reserve this year and a third cut next year, anticipating that rates will drop to around 3.65%. Morgan Stanley noted that if market expectations push rates down to 3.25%, the yield on 10-year Treasury bonds could fall below 4%. The bank expects that the U.S. Personal Consumption Expenditures (PCE) price index for January, to be released on Friday, will show a slowdown in price growth, which could be a decisive factor.
Morgan Stanley strategists Matthew Hornbach and others stated in a report that if the core PCE inflation data improves and the Federal Reserve's rhetoric becomes more dovish, investors will buy more long-duration bonds, allowing the market's implied trough rate to decline further.
It is understood that this week's three fixed-rate Treasury auctions received strong demand, with the seven-year Treasury auction on Wednesday concluding with a yield of 4.194% on $44 billion in auction, down from 4.203% in pre-auction trading before the bidding deadline, indicating demand exceeded traders' expectations. Similar results were seen in the two-year and five-year Treasury auctions earlier this week.
Bloomberg macro strategist Alice Andrews stated that without other fundamental data (such as Friday's PCE data), the likelihood of trading below 4.25% (the next logical and psychological yield support level) is low. However, she also pointed out that the risk is that falling below 4.25% could trigger investor concerns about missing out on a rebound.
The yield on 10-year Treasury bonds fell to about 4.24% on Wednesday and slightly rose to 4.28% during the Asian trading session on Thursday. In the second half of last year, this yield remained below 4% for several months, following significantly weak employment data in July, which led to expectations that the Federal Reserve would cut rates by one percentage point before the end of the year.
Subsequently, the process of lowering inflation stalled, and the Federal Reserve paused rate cuts in January, stating that further cuts could worsen the situation. Now, investors see reasons for lower yields not only in economic growth indicators but also in U.S. fiscal and immigration policies. This includes tariffs that U.S. President Donald Trump has consistently threatened to impose on major trading partners, a strategy that harmed the economy during his first term and raised concerns among Federal Reserve policymakers.
Hornbach wrote that a hard shift in immigration policy could result in next year's short-term GDP growth falling below potential levels. Increased investor attention to immigration trends should lower the still elevated expectations for the neutral rate
So far this year, Bloomberg's measure of U.S. Treasury yields has risen by 2.3%, surpassing the S&amp;P 500 index's increase of 1.3%. Most respondents in the February MLIV Pulse survey predict that U.S. Treasury yields will exceed the U.S. stock market in the coming month.
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Figure 2
On Wednesday, Trump provided a series of seemingly contradictory answers regarding his plans to impose tariffs on Canada, Mexico, and the European Union.
Gregory Daco, chief economist at EY, stated that while the U.S. economy is strong, increasing uncertainty surrounding trade, fiscal, and regulatory policies casts a shadow over the outlook, potentially leading to volatility in financial markets, with businesses and consumers increasingly adopting a wait-and-see approach.
A new survey from the Federal Reserve Bank of Philadelphia found that nearly one-third of U.S. workers are concerned about being laid off by their employers. The significant drop in the consumer confidence index on Tuesday is just the latest sign of a potential recession in the U.S. Citigroup's U.S. Economic Surprise Index has fallen to its lowest level since September, indicating that data has not met expectations.
Morgan Stanley noted that since President Trump's inauguration last month, the reduction of federal spending through the firing of government workers may also lead to a decrease in interest rate expectations.
Meanwhile, the government and its congressional allies are pushing for significant tax cuts, which could widen the U.S. budget deficit and necessitate additional borrowing. The budget blueprint passed by House Republicans last night calls for substantial spending cuts to offset the deficit.
Jim Bianco, president and macro strategist at Bianco Research, stated on Bloomberg Television that bonds are reacting to the possibility of reduced supply. Whether this will happen will be revealed later this year. As for whether this is stimulative or inflationary, that will also be revealed later this year.
In terms of inflation, the PCE price index excluding food and energy has grown by about 2.8% for three consecutive months. Morgan Stanley economists had previously predicted that the Federal Reserve would cut interest rates in June, but now expect the PCE price index to fall to 2.58% in January

U.S. Treasury yields have fallen to a new low for the year, as investors bet that the Federal Reserve will shift its focus to the slowing economic growth. Morgan Stanley strategists predict that if market expectations for interest rates drop to 3.25%, the 10-year Treasury yield could fall below 4%. This week's Treasury auction saw strong demand, indicating an increased market expectation for interest rate cuts

- U.S. government bond investors are shifting focus from inflation concerns to economic growth slowdown, leading to a sixth consecutive day of rising bond prices and falling yields.  
- Morgan Stanley strategists suggest that if market perceptions of the Federal Reserve change, the 10-year Treasury yield could drop below 4%, especially if the upcoming PCE index shows declining price growth.  
- Increased demand for fixed-rate bonds and concerns over trade and immigration policies are influencing investor sentiment, with a significant portion of the workforce worried about job security amid economic uncertainties.

U.S. Treasury yields "fall" to a new low for the year, triggering a bond market frenzy due to interest rate cut bets and policy changes